Business context and reporting period
Sunstone Hotel Investors, Inc. is a self-managed hotel REIT. This Form 10-K covers the fiscal year ended December 31, 2018; it is an annual filing, not a standalone fourth-quarter filing. At year-end, the company held interests in 21 hotels with 10,780 rooms, primarily upper-upscale properties in U.S. urban and resort markets. Hotels are operated by third-party managers.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $1,159.1 million | $1,193.6 million |
| Operating income | $298.9 million | $186.5 million |
| Net income | $259.1 million | $153.0 million |
| Income attributable to common stockholders | $237.6 million | $132.5 million |
| Basic and diluted earnings per common share | $1.05 | $0.59 |
| Adjusted EBITDAre, excluding noncontrolling interest | $331.8 million | $338.6 million |
| Adjusted FFO attributable to common stockholders | $264.2 million | $271.0 million |
| Cash from operating activities | $305.3 million | $306.8 million |
| Capital improvements and additions | $159.1 million | $115.1 million |
GAAP operating margin was approximately 25.8% in 2018 versus 15.6% in 2017, but 2018 operating income included $117.0 million of gains on asset sales; the comparison also reflects a much smaller impairment charge in 2018. Comparable-portfolio RevPAR rose 2.8% to $191.74, with ADR up 3.1% and occupancy down 30 basis points to 83.8%.
Fourth-quarter results: revenue was $280.9 million versus $290.2 million in Q4 2017; operating income was $45.5 million versus $34.9 million; net income was $77.8 million versus $20.7 million; and income per common share was $0.32 versus $0.07. Quarterly results reflect seasonality and asset-sale timing; the filing does not provide a standalone Q4 cash-flow figure.
Liquidity, debt and capital allocation
At December 31, 2018, cash and cash equivalents were $809.3 million and restricted cash was $53.1 million, for total cash and restricted cash of $862.4 million. Total debt principal was $982.8 million (carrying value, net of financing costs, was $977.1 million); total assets were $4.0 billion. The company reported approximately $305.3 million of operating cash flow and $156.4 million of net cash provided by investing activities, while financing activities used $158.6 million. Cash and restricted cash increased $303.1 million during the year.
Debt had a weighted average interest rate of approximately 4.19%; 77.6% was fixed-rate or fixed through swaps. The $220.0 million Hilton San Diego Bayfront mortgage was the principal unhedged floating-rate exposure, subject to an interest-rate cap through December 2020. The company had no borrowings under its $500.0 million revolving credit facility, extended to April 2023, and had two unsecured term loans and $240.0 million of senior notes. Its 2018 common dividend declared was $0.69 per share, compared with $0.73 in 2017; Series E and F preferred dividends remained $1.7375 and $1.6125 per share, respectively.
Material changes, outlook and risks
- Sold six hotels in 2018 for net proceeds of $348.0 million and recognized $117.0 million in net gains. The sales reduced the portfolio from 27 to 21 hotels.
- 2018 revenue declined 2.9%, largely reflecting dispositions. Comparable RevPAR increased, but four major renovations disrupted operations: management estimated approximately $8.0 million of room revenue displacement and 36,324 room nights out of service.
- Adjusted EBITDAre declined 2.0% and adjusted FFO declined 2.5%, despite higher GAAP net income; sale gains were a significant contributor to the GAAP increase. The company also recognized $5.8 million of Hurricane Irma business-interruption proceeds at Oceans Edge and a $1.4 million impairment charge on the Houston hotels before their sale.
- Management expected 2019 capital expenditures to be slightly lower than 2018 and expected to continue a regular common dividend of $0.05 per share per quarter. It anticipated a possible January 2020 “catch-up” distribution if needed to meet REIT distribution requirements. No quantitative earnings or RevPAR guidance is provided in the supplied filing text.
- Key exposures include lodging demand and economic cycles, new hotel and alternative-lodging supply, labor and operating-cost inflation, geographic concentration and severe weather, renovation costs, reliance on third-party brands and managers, lease and debt obligations, refinancing and interest-rate risk, and REIT qualification and tax requirements. The filing notes that no mortgage cash-trap provisions were triggered at year-end and that pending ordinary-course legal matters were not expected to materially harm financial position or results.
- Management and the independent auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Separate underlying operating performance from the $117.0 million of 2018 asset-sale gains; assess recurring earnings using GAAP results alongside the company’s non-GAAP measures.
- Review hotel-level performance and the expected post-renovation contribution of the four disrupted properties, including the impact of new supply in Boston, Los Angeles, New York and Portland.
- Confirm the uses of the substantial cash balance, the $63.6 million of outstanding construction commitments, and debt maturities and extension conditions, especially for the Hilton San Diego Bayfront loan.
- Assess the sustainability of common and preferred distributions against operating cash flow, required capital spending and REIT distribution needs; the stated 2019 common dividend expectation is not a guarantee.
- Check the full financial statements and notes for debt terms, lease obligations, tax matters, litigation related to sold hotels and sensitivity to changes in hotel demand and interest rates.